A survey of a large number of exploration and production companies by Lehman Brothers indicates that E&P spending next year will be flat to down slightly in the United States and Canada but up about 6.1% internationally as the majors continue to look overseas. Worldwide E&P spending, based on a survey of 335 companies, is expected to grow 4% to $144.3 billion, the survey found.
“North American E&P expenditures are estimated to be flattish with gains in spending by independents being offset by declines for the major oils,” said Lehman analysts James D. Crandell and Angeline M Sedita.
“In the United States, the 270 companies in our survey are forecast to reduce expenditures by 0.1% to $32.6 billion. While the 259 independents we surveyed are estimated to increase spending by 2.5%, the 11 majors are forecast to drop by 3.9%. In Canada, E&P expenditures are estimated to dip by 0.2% to $13.6 billion by the 58 companies we surveyed.”
In the United States, independents who spend less than $50 million are expected to increase spending by 19% in 2004. For independents that typically spend more than $50 million, 2004 spending is expected to increase only 1.4%. The large independents that are forecasting significant U.S. spending increases include EnCana (32%), Williams (98%), Westport Resources (28%), Nexen (34%), Noble (21%), Unocal (13%) and Burlington (10%). The large independents forecasting a drop in U.S. E&P spending include Anadarko (-7%), El Paso (-21%), Devon (-17%) and Kerr McGee (-27%).
“We believe the majors will continue their long-term trend of shifting expenditure overseas,” the analysts said. “We estimate declines in U.S. E&P spending by many of the majors, including Exxon Mobil (-5%), BP (-2%), Royal Dutch Shell (-15%), Occidental (-10%) and Murphy Oil (-37%).
Many majors also are expected to be spending less in Canada next year, while smaller independents are expecting spend more north of the border.
However, Lehman Brothers’ initial survey for 2003 significantly underestimated E&P spending for the year. The survey done in December 2002 forecast a 4.2% increase in worldwide E&P spending, a 0.7% drop in U.S. E&P spending and a 7.2% increase in Canadian E&P spending. Instead, spending rose by 24.1% in Canada, 4.1% in the United States and 10% worldwide.
“Given the large swing in gas prices in 2003, many of the smaller independents raised budgets,” the analysts said.
In fact 43% of the companies surveyed overspent their budgets because of the surge in cash flows from high gas prices. The average gas price expected for 2004 also could be underestimated given current price levels. Lehman Brothers said the average oil price budgeted for 2004 is $25.29/bbl (West Texas Intermediate). If oil prices were to average only $20, then 57% of the companies would cut their budgets, most of them by 10-20%.
The average U.S. gas price budgeted for 2004 is $4.17/Mcf at the Henry Hub. If gas prices average $3.50/Mcf, 59% of the companies would cut spending, most of them by 20-30%.
The largest determinants of E&P spending in 2004 (in order) are natural gas prices, cash flow, prospect availability, oil prices and drilling success. “Compared to last year, prospect availability as a major concern has modestly eased,” the Lehman analysts said.
The survey also found that 84% (up from 71% in last December’s survey) of the companies find the economics of purchasing reserves in the United States more favorable than drilling. However, the economics of drilling in the United States still are perceived to be good or excellent by 70% of the companies (compared to 63% a year ago).
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